PORTFOLIO POINT: While there are never any guarantees in life, here is our list of the top 10 most likely takeover targets for the current financial year.
Recent moves by corporate heavyweights (no pun intended) Gina Rinehart, James Packer and Lachlan Murdoch have caused a fresh bout of market focus on various takeover targets. History tells us, however, that speculation about such matters often remains just that – speculation – without profitable bids emerging. Here I examine 10 of the most spoken about targets and offer my assessment as to whether takeovers of them are likely to occur.
1. Coca-Cola Amatil (CCL)
Just weeks ago yet another of Australia’s brewers, Little World Beverages (LWB), was snapped up by a foreign bidder (in this case, Japanese beer giant Kirin). When combined with the disappearance from the local bourse of both Lion Nathan and Foster’s, Australian investors are left with just one sizable beverages company in which to invest – CCL. It has a great portfolio of brands (e.g. Coke), massive distribution capability in Australia, the South Pacific and parts of South-East Asia and a strategic shareholder in the Coca-Cola Company of Atlanta (which owns 30% of CCL). When Lion Nathan made its unsuccessful bid for CCL three years ago, the Coca-Cola parent indicated it was not averse to a bid per se, just that any bidder had to be the right partner. Expect either the Japanese or Philippines giant San Miguel to have another crack.
2. Carsales.com (CRZ)
Recent debate over the future (or lack thereof) of 'old’ media like the newspapers produced by both Fairfax (FXJ) and Newscorp (NWS) serves to highlight the giant strides made by their 'new’ media rivals. Chief amongst them is CRZ, which now accounts for around 60% of Australia’s automotive classifieds market. The company is highly profitable, dominates its competitors and exists in an industry relatively unaffected by overall economic circumstances (i.e. people still buy and sell cars in bad times as well as good). My expectation is that eventually one of the former old media titans will make a bid for CRZ in an effort to stay viable in the 21st century.
3. Echo Entertainment (EGP)
Since I last recommended EGP as a target stock, the James Packer controlled Crown (CWN) has increased its holding from 4.9% to just under 10%. In addition, Malaysian casino operator Genting has also moved up the register with a stake now also of almost 10%. While it’s possible that CWN and Genting may ultimately do a deal to divide up EGP between them, the lure of monopoly assets like Sydney’s Star casino (surely EGP’s potential jewel in the crown), as well as similar operations in both Brisbane and the Gold Coast suggest that a bidding war is more likely. Packer in particular wants to create a high roller mecca in Sydney to rival his Crown operation in Melbourne – and control of EGP is the only way to achieve this.
4. Tabcorp (TAH)
When TAH made the decision a year ago to demerge its casino business (i.e. EGP) from its wagering and soon-to-be-defunct pokies operations, the ultimate goal was to promote bids for both companies. The obvious bidder for TAH is rival Tatts Group (TTS), which like TAH will soon be looking for a revenue stream to replace the pokies licence stripped from both companies by the former Brumby government in Victoria. Because TTS’s businesses are in many ways similar to those operated by TAH, both companies are a natural fit for each other. The only real impediments to a deal are (a) the various state run regulatory bodies who may view the creation of yet another monopoly with some concern, and (b) potential disagreement between the two boards about relative valuations of the two companies.
5. Graincorp (GNC)
Notwithstanding the fact that politicians like Barnaby Joyce and Bob Katter think Australia is at risk of 'selling off the farm’, strong rural businesses remain of intense interest to foreign buyers. In recent years we’ve seen both AWB (the former Australian Wheat Board) and ABB Grains (ABB) snapped up, leaving GNC as the last locally listed grain handler of any size. GNC has wonderful monopoly style assets (e.g. grain silos on rail lines), strong relationships with its customers (i.e. farmers and buyers) and improved profitability given good rainfall in most of Australia’s grain growing areas. International players like Glencore and Agrium are leading a global charge for consolidation in this sector, meaning GNC is a likely target.
6. Woodside Petroleum (WPL)
Both oil and gas prices have weakened in 2012, meaning that the share prices of major producers like WPL have sagged. Nevertheless, WPL remains firmly in play because its major shareholder, Shell, owns a stake of 24%, which it has signalled is for sale. Under Australian takeover laws, anyone buying a stake in a company greater than 19.9% must make a follow-on bid at the same price to all other shareholders. The key, therefore, to WPL’s future as either an independent company or a takeover target is the sale process surrounding Shell’s stake – if it’s broken up and sold to many buyers, then a bid becomes less likely. Should one buyer for the whole lot emerge, however, then a takeover is a near certainty.
7. Billabong International (BBG)
Companies that experience management and board upheaval, earnings downgrades and massive capital raisings all at the same time rarely make good investment opportunities. BBG may well be an exception to this rule, however, due to its still-strong portfolio of brands. At its current share price of just $1.03, BBG is trading well below the $3.30ps amount private equity fund TPG offered just months ago. Will TPG return? Well, had founder and still major shareholder Gordon Merchant maintained his previous opposition to any bid ''¦below $4 per share’, I’d have said no chance. Last week, however, Mr Merchant reportedly changed his stance towards potential buyers, and accepted that another bid was now probably inevitable. Given the well documented stresses faced by bricks-and-mortar retailers around the globe, BBG is not for the faint-hearted – yet its huge and sudden fall in value may tease out a buyer at a significant premium to the current price.
8. Consolidated Media (CMJ)
Given the high likelihood James Packer’s CWN will bid for EGP (see above), it makes sense for Mr Packer to divest his remaining media holdings in order to raise extra cash. CMJ’s 25% stake in Foxtel is a still attractive old media asset that has already attracted a bid from the recently acquisitive NWS at $3.50ps. Investor interest in CMJ should only have increased with the news that 25% shareholder Seven Group Holdings, controlled by rival media mogul Kerry Stokes, has sought ACCC approval for a rival takeover bid. While it’s possible that Stokes’s move is a bargaining chip to assist him in future negotiations with NWS, at a current price of just $3.38ps CMJ appears to have plenty of upside potential in place.
9. Fairfax Media (FXJ)
If FXJ was able to make money from those who have recently written about its potential future, then the company would have no financial problems at all! While the emergence of Gina Rinehart on the register with an 18.6% holding is seen as a great threat by both FXJ’s board and many of its journalists, I suspect she is there simply to make money – and that can’t be a bad thing for shareholders. Having said this, there are no obvious solutions to the seemingly terminal decline faced by printed newspapers, and the inevitable write-downs of mastheads like 'The Age’ and the 'Sydney Morning Herald’. Rather than make a full bid, I think Ms Rinehart will move to 19.9% and then continue her campaign for two or three board seats – which she will eventually get. Once her desire for representation on the board is fulfilled, only time will tell whether success mining iron ore translates to success in media.
10. Ten Network Holdings (TEN)
TEN shares with FXJ the presence of Gina Rinehart on its share register. TEN also enjoys the support of both James Packer and Lachlan Murdoch as partial owners, a combination which would normally scream 'buy’ to investors. Despite this, I’m reluctant to label TEN an obvious takeover target. The challenge posed by the internet to free-to-air TV’s business model will become stronger as initiatives like the National Broadband Network come to fruition. Viewers’ attention is increasingly being diverted away from the 'watch what we want you to watch’ proposition put forward by TEN, as well as channels Nine and Seven, to the 'we’ll watch what we want and when’ permitted online. Twenty years ago TEN pretty much went broke and was rescued by Canadian media baron Izzy Asper. Unfortunately, in 2012 I don’t think such a white knight waits around the corner.
Tom Elliott, a director of Beulah Capital and MM&E Capital,may have interests in any of the stocks mentioned.